AID AND STATE-BUILDING Miles Kahler University of California, San Diego [email protected] Paper presented at the The Graduate Center, City University of New York 3-4 April 2008 AID AND STATE BUILDING Miles Kahler* University of California, San Diego Three powerful constituencies, following distinct logics, have elevated fragile and failed states on the international agenda over the past decade. The first has defined the role of international actors as ending persistent civil wars and building peace. The states of concern are post-conflict states, and the impulse to intervene has been humanitarian. Over time, however, this constituency has redefined its role as longer term, and it has aimed to rebuild legitimate political institutions as a means of preventing further violence. The development lobby and aid agencies, long been active in many fragile states, represent a second constituency. The successful industrialization of China, India and other poor countries, has produced a new separation within the developing world between those achieving rapid economic growth and the “bottom one billion” that have diverged from the success stories.1 A recent redefinition of the requirements for successful economic development led this second constituency to concentrate on governance and political institutions as a key to economic growth. The World Bank and other aid agencies defined fragile states by their * The author thanks Jeremy Horowitz for the contribution that his research assistance has made to this paper and the larger research project. Clark Gibson and Eddy Malesky offered very helpful comments on an earlier draft of this paper. The author also thanks the Carnegie Corporation of New York for its financial support through the project Rebuildng Political Authority in States at Risk: International Strategies and the Role of NGOs. 1 Collier 2007. 2 poverty and “weak policies, institutions, and governance.” 2 Finally, following the terrorist attacks of 11 September 2001, the defense lobby and national militaries, which had largely dismissed “nation-building” during the 1990s, rapidly accepted the security threats posed by political instability and governments that could not police their territories. The persistence of state failure had become an issue of international security. Although the mobilization of these constituencies has produced international attention to societies plagued by internal conflict, weak governance, and economic stagnation, engagement has not meant successful state building. Even apart from the long shadow of continuing conflict in Afghanistan and Iraq, other recent state-building efforts have produced ambiguous results. Albanian Kosovars grew restive under a lengthy United Nations tutelage; resolution of the territory’s final status has been blocked by Russia in the Security Council. Despite UN trusteeship, early independence, and a large flow of resources, Timor-Leste erupted in violence in May 2006, threatening regress into state failure and producing renewed international military intervention. Fragile peace held in other cases, such as Liberia and Sierra Leone, but the consolidation of national government was hardly assured. Uncertain success in state building was combined with a shortage of available international instrument for restoring political order after conflicts and 2 The World Bank has recently replaced the term LICUS (Low-Income Countries Under Stress) with fragile states, following other aid agencies, such as the U.K. Department for International Development (DfID). Fragile states will be used in this paper. Within LICUS, “two criteria are used to define core and severe LICUS: per capita income within the threshold of International Development Association (IDA) eligibility and performance of 3.0 or less on both the overall World Bank Country Policy and Institutional Assessment (CPIA) rating and on the CPIA rating for Public Sector Management and Institutions.” (World Bank IEG 2006, 3-4). The CPIA and other governance indicators are described below. 3 improving governance in the interests of economic development. Military interventions, international trusteeship, or political engineering were part of a short-term toolkit that were not politically or financially sustainable as instruments of long-term engagement. Other instruments, such as trade or other economic incentives, are of doubtful utility when economic prospects are poor and political capacity is severely limited. By default, aid has become the chosen instrument for influencing the political and institutional development of these societies. Aid is a controversial tool for state building, however. Heated political conflict surrounds aid strategies—aid’s effectiveness and desirable levels have both been challenged. The left and its celebrity allies, such as Bono, press for more aid and few conditions for its use. Skeptics find little positive economic benefit from aid and argue for its perverse and even negative consequences. Aid conditionality is viewed as either coercive or useless or both. This investigation will outline and evaluate aid as part of an international strategy for consolidating political order and improving governance. Three questions are central: Can aid promote the creation and strengthening of state institutions in fragile states? What are the shortcomings in contemporary deployment of bilateral and multilateral aid for purposes of state building? What alternative strategies are likely to be more successful? The questions will be addressed in the following four sections, beginning with a brief review of the effects of aid on economic growth and governance, a debate that has reinforced skepticism about aid effectiveness at a time of rising aid disbursements. The aid relationship between donors, their constituencies, and political actors in fragile 4 states will then be modeled as a special case of aid dependence. A review of the dilemmas that beset aid relationships in fragile states will employ four cases— Cambodia, Haiti, Sierra Leone, and Central African Republic—to demonstrate the shortcomings of an aid strategy under conditions of state fragility. In light of the preceding discussion, proposals for reforming aid relationships with fragile states are evaluated. Aid as an instrument of state building The design of strategies toward fragile states has intersected with a long- running and inconclusive debate on the effects of aid. That debate, which has undermined the intellectual case for aid in promoting economic growth, has, paradoxically, occurred during a decade in which aid flows have increased.3 Although different model specifications produce different results, most researchers have failed to find any systematic effects of aid on growth.4 This finding seems robust across types of aid. Since aid represents a resource transfer, the failure to find a positive effect on growth is a puzzle that has produced a second finding of much greater importance for fragile states: aid’s effects are conditional on the quality of institutions and governance. The association between economic performance and quality of institutions reinforced the finding that aid has a positive effect on economic growth in low- income countries with “good” policy regimes, at first defined by macroeconomic 3 World Bank (IDA) 2007. After post-Cold War decline, aid (measured as ODA) has increased since the late 1990s. The composition of aid has also shifted, toward general budget support and sectoral program. 4 Rajan and Subramanian 2005, also Easterly 2003. 5 policies and later expanded to include broader, institutional measures of policy (strength of property rights, absence of corruption, and quality of bureaucracy).5 The implication, quickly drawn by many development economists and practitioners, was that aid should be given more selectively, allocated to countries on the basis of institutional quality and commitment to poverty reduction. The new orientation was embodied in the Millennium Challenge Account, established by the United States government: nations that combated corruption, respected human rights, and adhered to the rule of law, among other estimable ends, would be rewarded with increased aid. Unfortunately, rewarding good governance in the interests of aid effectiveness meant that many of the poorest and worst governed countries—fragile states--faced a future as aid orphans. Their persistent insecurity and unstable political institutions had already produced disengagement by bilateral and multilateral aid donors. Alternative means of engagement were required. In particular, the third stage of the aid and development argument centered on aid’s promise to improve governance in fragile states. The most acerbic critics of contemporary development fashion have pointed out that emphasizing governance and institutions as critical to economic development and aid effectiveness has not produced a blueprint for institutional improvement.6 Worse, aid dependence—defined as an inability to perform core functions of government without external funding—may undermine institutional 5 Burnside and Dollar 2000a, 2000b. The effects of institutional quality also apply at the project level. Isham and Kaufman 2000 find that measures of public accountability improve project performance. 6 Stiglitz 2000, Easterly 2007. 6 quality and better governance.7 Since fragile states—often post-conflict states with shrunken economies—are likely candidates for aid dependence, the possible negative effects of aid on governance may further complicate international efforts